Mortgage payments are on the rise after five successive Bank of England interest rate hikes and further increases expected in the coming months.
The Bank is seeking to contain inflation which is on track to hit 11% this year – the highest in four decades.
Ultra-low interest rates have made mortgages cheaper, inflating a housing bubble that has made home ownership a distant dream for many renters in parts of the UK.
But, as the era of low rates draws to a close, will the UK’s out-of-control property market begin to cool and could we even be heading for a crash?
What is the latest UK house price data?
Official figures released this week show prices rose 12.4% on the year to April. It was a big jump from the 9.7 per cent increase seen in March, and means the average selling price has risen by £31,000 – more than the UK median wage – to £281. £.00.
For now, it seems, buyers are willing to put up with the relatively modest rise in monthly mortgage payments, although official data does not yet reflect the most recent interest rate increases.
All four countries have seen significant increases in the cost of a house, with average prices rising in England to £299,000 (11.9%), Wales to £212,000 (16.2%), Scotland at £188,000 (16.2%) and in Northern Ireland at £165,000 (10.4%).
Growth was slowest in London at 7.9%, although the capital still has the UK’s most expensive property.
More recent figures from Halifax show prices were still rising rapidly in May.
Despite fears over the cost of living and steep rises in energy bills, house prices are up 1% (about £3,000) from April and 10.5% on the year.
The average house price hit £289,099 after the 12th consecutive monthly rise.
Halifax said a “persistent imbalance between supply and demand” for properties remains the main reason prices are hitting new record highs.
A “race to space”, which began during the pandemic, is expected to continue as people move from city apartments to bigger homes in more rural areas.
“However, the housing market has started to show signs of cooling,” said Russell Galley, managing director of Halifax Mortgages.
“Activity has started to decline and, coupled with the inflationary pressures currently on household budgets, it is likely that activity will start to slow.”
However, there are some signs that prices could still be supported by strong demand. Estate agent Chestertons said it had seen a 31% increase in the number of people signing up for viewings at its London branches.
Chief executive Guy Gittins said there is now a “strong seller’s market” and the number of sellers willing to cut their asking prices has fallen 38% over the past year.
“The sheer volume of agreed sales in April created a difficult workload for lawyers and banks, which impacted the time it takes to finalize a sale,” he said.
Rising interest rates will affect some buyers’ ability to buy a home, but the effect may be limited.
How much have mortgage rates increased?
Some lenders have raised their mortgage rates to twice the Bank of England base rate.
HSBC raised prices for fixed-rate mortgages by 0.45 to 0.5 percentage points last week, well above the quarter-percent increase in the base rate. Nationwide also raised rates by 0.4 percentage points.
The Bank of England’s latest decision will have an immediate impact on the 1.9 million borrowers on standard or tracker variable rate mortgages, which move with the base rate.
On a £200,000 25-year mortgage, that means an extra £700 in interest payments over two years.
Around 75% of Britain’s 9million mortgage borrowers are on fixed deals, according to banking trade body UK Finance.
Fixed rates are also on the rise, with the average two-year fixed rate up almost 1% since December 2021.
The average two-year fixed rate is now 3.25%, down from 2.34% in December, according to figures from Moneyfacts.
Five-year contracts are up 3.37% from 2.64% six months ago.
As the spread between the average two-year and five-year fixed rate has narrowed, fixing longer may be a smart move, said Moneyfacts finance expert Rachel Springall.
Even longer terms are available at similar rates, with the average 10-year fixed contract now at 3.36%.
What is driving rising house prices in the UK?
Prices were inflated by the supply of cheap credit. Although rates are increasing, they are still very low by historical standards.
Housing supply also remains a problem. There aren’t enough properties people want in the areas they want.
There is now a clear dividing line in the market between houses, which are in high demand, and apartments, which are proving harder to sell in many areas.
The UK’s planning system has been accused of slowing down the process of building new properties and restricting supply.
Government proposals to radically overhaul the system and replace it with a zoning model that would automatically approve developments in designated areas have proved controversial. Some reports suggest ministers will abandon the changes.
Big developers are also being criticized for hoarding large amounts of land that may not be used for building for years. In the meantime, developers are profiting from holding land as values continue to rise while the supply of new homes is limited.
What future for UK house prices?
Property market pundits are divided on where house prices will move next, but few predict a fall this year.
The question is how fast prices will continue to rise.
Tom Bill, head of UK residential research at Knight Frank, said the recent period of price growth appeared to have peaked last month.
“We don’t expect prices to come down, but we’re likely in the last month or two of double-digit annual growth,” he said.
“The psychological impact of a rising base rate above 1%, higher mortgage rates, a squeeze in the cost of living and the gradual rebuilding of supply will all contribute to the slowdown as housing prices real estate will come back down later this year.”
Halifax expects home price growth to slow further as affordability becomes tighter.
“The house price-to-income ratio is already at an all-time high, and with interest rates rising and inflation further squeezing household budgets, it remains likely that the rate of growth of house prices will slow by the end of this year,” Halifax chief executive Russell Galley said.
Capital Economics also predicts a sharp slowdown in price growth towards the end of the year.